What Are Price Increase Clauses?

Price increase clauses are contractual provisions that allow for adjustments to the contract price based on changes in the cost of materials. These clauses are crucial for managing financial risk in construction projects. Here’s why they are important:

  1. Risk Management: They help manage the risk of cost fluctuations, ensuring that contractors are not unfairly burdened by unforeseen price increases.
  2. Financial Stability: By allowing for price adjustments, these clauses contribute to the financial stability of the project, helping to maintain cash flow and budget control.
  3. Fairness and Transparency: Clearly defined clauses provide transparency in how price changes will be handled, reducing disputes and misunderstandings.
  4. Project Continuity: They help maintain project continuity by addressing cost issues promptly, avoiding delays due to financial disagreements.

Key Elements of Effective Clauses

An effective material price increase clause should include several key elements:

  1. Trigger Events: Clearly defined events that will initiate the price adjustment. These could include specific cost indices, material price changes, or regulatory adjustments.
  2. Adjustment Formula: A clear formula or method for calculating the price change. This could involve referencing external indices, calculating a percentage increase, or using a predefined formula.
  3. Notification Procedures: Detailed procedures for notifying the other party of the price increase, including timelines and required documentation.
  4. Documentation Requirements: Specifications of the documentation required to support the price increase, such as receipts, invoices, or official indices.
  5. Limits and Caps: Maximum and minimum limits on the price adjustments to provide predictability.
  6. Dispute Resolution: Procedures for resolving disputes related to price increases, including mediation or arbitration clauses.

Examples of Material Price Increase Clauses

Here are some examples of effective material price increase clauses in construction contracts:

Example 1: Basic Escalation Clause

“In the event of an increase in the cost of construction materials exceeding 5% of the initial contract price, the Contractor shall be entitled to an adjustment in the Contract Price. The adjustment shall be calculated based on the percentage increase in the cost of materials as documented by [specified index or source]. The Contractor shall provide written notice and supporting documentation within 30 days of the cost increase.”

Example 2: Detailed Escalation Clause with Caps

“Should the price of construction materials increase by more than 10% as evidenced by [specified index], the Contractor may request a price adjustment. The adjustment shall not exceed 15% of the initial Contract Price. The Contractor must notify the Client in writing within 14 days of becoming aware of the increase, providing detailed invoices and receipts. The parties agree to negotiate in good faith to reach an amicable resolution. If no agreement is reached, the dispute will be resolved through mediation.”

Example 3: Escalation Clause with Time-of-Delivery Adjustment

“In the event that the price of [specific material] increases by more than [specified percentage] due to market conditions, the Contractor shall be entitled to an adjustment in the Contract Price. The adjustment shall be based on the difference between the market price at the time of contract signing and the market price at the time of material delivery. The Contractor shall provide evidence of the price increase through supplier invoices and market reports.”

Tips for Drafting and Implementing Clauses

Drafting and implementing effective material price increase clauses requires careful consideration and planning. Here are some tips:

  1. Research and Benchmarking:
    • Conduct thorough research on current market conditions and price indices relevant to the materials used in your project.
    • Benchmark against similar projects to understand common practices and standards.
  2. Clear and Precise Language:
    • Use clear and precise language to avoid ambiguities. Ensure that all terms and conditions are easily understood by both parties.
    • Define technical terms and include explanatory notes if necessary.
  3. Legal Compliance:
    • Ensure that the clause complies with relevant laws and regulations. Seek legal advice during drafting to ensure enforceability.
    • Consider including a force majeure clause to account for unforeseen events that might drastically affect material availability and pricing.
  4. Flexibility and Fairness:
    • Draft clauses that are flexible enough to accommodate reasonable adjustments while protecting the interests of both parties.
    • Include provisions for regular reviews and updates to the clause to reflect changing market conditions.
  5. Documentation and Transparency:
    • Specify the documentation required to support any price increase claims. This helps maintain transparency and trust between the parties.
    • Include procedures for regular reporting and updates on material prices.


Material price increase clauses are essential components of construction contracts, providing a mechanism to adjust prices fairly in response to changing costs. By understanding the importance of these clauses, knowing the key elements to include, and following best practices for drafting and implementing them, home builders and contractors can better manage risks and ensure project success.

Including clear and comprehensive material price increase clauses in your contracts helps protect your interests, maintain financial stability, and foster positive relationships with clients. This comprehensive guide provides the knowledge and tools needed to draft, negotiate, and implement effective material price increase clauses in your construction contracts, ensuring smooth and successful project completion.